Chapter 15 - Nothing is free Flashcards
Detailed Summary
This chapter, deeply rooted in the psychology of investing, unveils the unique concept of volatility as a “fee” rather than a “fine”. It starts by examining the natural inclination of humans to willingly pay a price for an endeavor when the benefit is fixed, apparent, immediate, or when the price itself is known. However, the uncertainty that often surrounds investments causes hesitation. Just as people often underestimate the challenges of a job until they experience it firsthand, many fail to understand the complexities of investing until they navigate the unpredictable waters themselves.
In the investing landscape, the potential for high earnings comes hand in hand with an often-ignored baggage - volatility. Successful investments in high-performance stocks over a long period promise significant returns, but they also carry a series of lows, underperforming periods, and unpredictable movements that cast doubt and fear in the minds of investors. Investors’ fear for their future and the uncertainty surrounding their decisions make them perceive this volatility as a fine they are being penalized with, rather than a fee they are paying for the potential of higher returns.
The narrative then shifts towards understanding the nuances of different investment approaches. Consider, for instance, the option of investing in stable stocks with lower but more certain returns. By paying a lower fee in terms of risk and volatility, one can expect a more stable but lesser reward. But not everyone is willing to follow this route. Some investors, especially those new to the game, often seek shortcuts to circumvent these inherent costs, likened to ‘stealing the car’ rather than buying it.
Day trading, for instance, appeals to many who are lured by the prospect of making quick profits by capitalizing on short-term market fluctuations. However, this approach requires them to navigate a landscape fraught with time constraints, extensive research, and a high level of risk tolerance, which many fail to realize until it’s too late. Other speculative investment avenues such as certain cryptocurrencies or ‘meme stocks’ also attract a crowd seeking quick riches, but often lead to disastrous outcomes when the asset inevitably crashes.
Investing shortcuts may seem appealing, but the costs are high. By avoiding the ‘fee’ of investing, which includes understanding the asset, exercising patience, and accepting potential losses, investors expose themselves to excessive risk. The illusion of a joyride often ends in severe consequences. That’s not to say that every short-term investment or attempt to outperform the market is doomed. With the right systems, skills, and risk management strategies, some can succeed. However, for the majority of investors, particularly those without substantial experience, a consistent, long-term approach often proves safer and more rewarding.
The resistance to pay the fee of investing stems from the uncertainty of the reward. Many perceive the inherent volatility not as a necessary cost for future gains, but as a recurring penalty. This mindset needs a shift. We need to accept that uncertainty equals risk, understand that there are no assured outcomes, and recognize our cognitive bias towards avoiding losses. Navigating through uncertainty requires us to be less reactive and more rational. By reframing our understanding of volatility as a fee for potential rewards rather than a fine, we can make better, more informed decisions in our investment journey.
Key pints
Five Key Point List
- The inherent volatility in high performance stocks is a fee, not a fine, for the potential high returns, and should be seen as an integral part of successful investing.
- Many investors, especially novices, often try to bypass this ‘fee’ and opt for shortcuts like day trading or speculative assets to achieve quick profits, which is similar to ‘stealing a car’ instead of buying it.
- Avoiding the ‘fee’ of investing, which involves understanding the asset, exercising patience, and accepting potential losses, exposes investors to higher levels of risk.
- Despite the allure of quick gains, long-term, patient investing in well-researched assets is often the safer and more profitable path for the majority of investors.
- The resistance to pay the ‘fee’ of investing stems from uncertainty of the reward. Shifting this mindset to view volatility as a fee, not a fine, can lead to more informed investment decisions.
Q1: What is the ‘fee’ of investing as discussed in the chapter?
A1: The ‘fee’ of investing refers to the inherent risks and volatility associated with investing, particularly in high-reward stocks. It includes the time it takes for an investment to mature and the risk tolerance needed to endure market volatility.
Q2: What does the author mean by ‘stealing the car’ in the context of investing?
A2: ‘Stealing the car’ is a metaphor used to describe investors who try to circumvent the ‘fee’ of investing - they seek shortcuts to gain quick profits without bearing the inherent risks and costs. Examples include day trading or investing in highly speculative assets.
Q3: Why do some investors view volatility as a ‘fine’ rather than a ‘fee’?
A3: Investors often view volatility as a ‘fine’ due to the uncertainty and perceived risk associated with it. The unpredictable nature of investments and the fear of potential losses can make volatility seem like a recurring penalty rather than a necessary cost for potential gains.
Q4: Why is long-term investing often safer and more profitable for most investors?
A4: Long-term investing is often safer and more profitable because it allows for compounding, reduces the impact of short-term volatility, and aligns with the historical trend of markets rising over time. It also encourages a deep understanding of the asset, patience, and acceptance of potential losses, which helps in making informed decisions.
Q5: How can investors shift their mindset about volatility?
A5: Investors can shift their mindset by understanding that volatility is a part of the investment process, akin to a ‘fee’ rather than a ‘fine’. Accepting that uncertainty equals risk, recognizing cognitive biases like loss aversion, and making decisions based on logic rather than emotions in uncertain situations can lead to more informed investment decisions.
